Currency trading gains retail-investor following

Stocks’ lost decade raises appeal; a new market for U.S. day traders

By

DeborahLevine

NEW YORK (MarketWatch) — Andrew Weissman started trading currencies last spring after he graduated from college with a finance degree and found it hard to land a traditional job.

“When I started trading currencies, in the first few days I made money but didn’t know why, and I thought it was the greatest thing,” he said. “Then I went on a two-week losing streak and thought, ‘I’m terrible at this!’ ”

Weissman is part of a growing number of individuals who are starting to trade currencies, a market that has grown to $4 trillion a day.
SPZ10

Retail trading makes up a small portion of that total volume. But the share is expected to triple in the coming years as more individuals look for alternatives to stocks after a money-losing decade and find themselves dissatisfied with low bond yields. For some, foreign-exchange trading and its opportunity for sudden, leveraged moves, has the attraction that day trading in stocks once held.

“We’ve seen a lot of people coming into this who want to do this for themselves, on a personal level,” said Weissman, who is now helping his father run a currency-trading training service called Forex New York City. See Forex New York City’s site.

“Currency trading is great because you have the potential to completely control all of your money, and maybe don’t need a 9 to 5 job.”

Once the domain of professional investors and the very wealthy, foreign-currency trading is now getting popular with small U.S. investors. At FXCM Inc., which operates an online foreign-exchange trading site, the average account size is $6,000 to $10,000. The median age of clients is 35, and most are male and in the middle- to higher-income brackets. See FXCM’s site.

Average daily currency volume from retail traders globally jumped to $125 billion this year, up twelvefold from $10 billion in 2001, according the Aite Group.

Retail trading could rise to account for up to 10% of the global currency volume in the next five years, from about 3.5% currently, depending on how much the sector becomes regulated, the research firm has predicted.

Still, some types of investors are likely to stay away. Trading currencies tends to be driven day-to-day by technical levels and positioning, which could frustrate investors looking for longer-term diversification. Trading also typically employs high leverage, and the swings can be jolting. Read related story: ‘How I lost $100,000 trading currencies.’

Some would-be investors may also worry about getting caught in another currency crisis. The 21% plunge in the euro
EURUSD, -0.5086%
from December 2009 to its June lows is the most recent example, but the Asian financial crisis and Mexico’s peso crisis in the 1990s are also hallmarks of currency upheavals.

The dollar index
DXY, +0.47%
a measure of the greenback against a basket of six major currencies, gained almost 16% during the European debt crisis, but has given back half of that since June.

Stock-market refugees

Still, for the adventurous, the allure is simple.

The volatile nature, and ultimately money-losing direction, of U.S. stocks since 2000 has shaken many small investors out of equities.

Investors have pulled a net $50 billion from U.S. stock mutual funds this year, extending a three-year exodus, according to TrimTabs Investment Research. And inflows in 2005 and 2006 were relatively small.

And investors who sought to protect their principal in the bond market, saw government bond yields fall to all-time or multiyear lows. One selling point for currencies: One party in the trade always gains.

“Forex retail trading is definitely a bigger hope for people to make more money than from stocks,” said Leon Yohai, chief executive of ZuluTrade, a trading site that lets individuals piggyback on successful currency traders. See ZuluTrade’s site.

“In forex, you can make money going long or short, and you have more leverage and more tools,” Yohai said.

The field has grown as technology has enabled Internet-based trading platforms to offer currency trading to individuals and their relatively small purses.

Growing interest from North American individual investors marks a shift in investing attitudes.

U.S. retail investors have lagged their global peers when it comes to currency trading — perhaps a function of cultural attitudes toward short-term investments and the country’s relative geographic insulation compared with Asian or European countries.

The Americas region comprises 22% of global retail forex trading. Retail forex trading in Europe, where residents regularly exchanged currencies every time they crossed a border before the advent of the euro, makes up 28% of the global pie.

Retail currency trading is most popular in Asia, which comprises 45% of global retail forex trading, according to Aite. In Japan, currency trading is common among housewives managing family investments because the country’s two-decade-long stagnation has encouraged savers to look overseas for higher returns.

There’s also a cultural aspect. Some countries look at day trading as akin to gambling, said Sang Lee, a researcher at Aite. That’s not a problem for others.

In Singapore, Hong Kong, mainland China and Japan, “taking risks in foreign exchange has been more widely accepted,” Lee said.

A 24-hour market

Even for the most avid day trader, however, jumping into currencies means learning a whole new terminology and adjusting to a market that’s open 24 hours a day, five days a week.

“Compared to stocks, it takes more of a learning curve initially,” said Michael Stumm, chief executive and founder of Oanda, a forex platform. See Oanda’s site.

Currency traders should try to identify in advance how high they expect something to go and let it go in that direction, he said. Reducing losses requires designating a point where you get out.

The natural reaction is “when you get a little profit, to get out of the position to lock it in,” Oanda’s Stumm said. “Then when we lose, people wait for it to go up and end up losing more.”

Another attraction, and risk, is the ability to use leverage. Borrowing to increase the potential return of a small investment can also mean very large or very quick losses if the trade goes against you.

“People got discouraged and switched from equities to alternative investments like commodities or bonds, and now we’re seeing a lot of people want to trade forex because the leverage is way higher,” said ZuluTrade CEO Yohai. “But the risks are very big if you use high leverage and don’t know what you’re doing. You can lose all of your money immediately.”

That leverage is both the big appeal of the currency market and a major risk, which regulators are keen to rein in for individuals. The large U.S. retail trading sites are regulated by the Commodity Futures Trading Commission and are identified as futures commission merchants.

Every county had different leverage limits, said Stumm. In the U.S., individuals had been allowed to leverage themselves by 100 to 1, but the CFTC recently said it will reduce that limit to 50 to 1. That’s still higher than in Canada and Japan, Stumm said.

“We believe tightening is the right idea,” he said. “We think 100 to 1 makes it too dangerous and gives clients too much rope to hang themselves with.”

The learning curve and the risks of high leverage are why some companies have come up with automated ways for individuals to trade based on the strategies of more successful currency traders. FXCM offers a System Selector option, while ZuluTrade’s whole platform is set up like currency trading “for dummies,” said Yohai. “You don’t need to have a clue.”

How to get started

It doesn’t take much money to open a forex trading account. At Oanda, accounts can be started with $1. FXCM’s micro account can be opened for as little as $25. GAIN’s Forex.com and Global Forex Trading, or GFT, offer accounts starting around $250. ZuluTrade offers mini accounts for $500. See Forex.com’s site and GFT’s site.

There isn’t a cost per trade, like some online stock-trading outlets. The cost is the spread between the bid and ask prices.

Besides various online tutorials, videos, research from their own analysts and customer support, most major trading providers offer potential clients a demo account so they can try their hand at trading forex before putting real money on the table.

Stock investors may have to look to unfamiliar platforms to trade currencies. Some of the biggest online stock-trading firms don’t offer foreign exchange.

Charles Schwab
SCHW, -0.25%
and ScottTrade representatives said they don’t currently offer foreign-exchange trading but will continue to evaluate it in the future. An ETrade Financial
ETFC, +0.56%
spokeswoman said the closest thing the brokerage offers is converting currencies to purchase other foreign investments.

FXCM thinks the market’s prospects are bright enough that it is planning an initial public offering of stock.

There are some more prominent global banks that have retail currency-trading offerings, but they’re geared toward people and small firms that can put more money in.

Deutsche Bank
DB, -3.99%
launched dbFX in 2006, and investors need a minimum of $5,000 to open an account, according to the website.

Citigroup Inc.
C, -0.18%
offers CitiFX, with a minimum account of $10,000, but the average account size is much bigger, said Sanjay Madgavkar, head of FX margin trading at Citi.

“Our target market is someone who is experienced and understands the impact of leverage,” he said. The majority of forex-trading volume at Citi is among small institutional clients with $2 million to $5 million of net worth.

But having big international banks interested in the arena of retail currency trading says a lot about its growth potential, said Aite Group’s Lee.

“The volume continues to increase significantly, but it’s still far from hitting the mainstream,” Lee said.

Another factor holding back the growth is that, so far, it’s mainly the domain of active traders with short-term objectives.

“There’s a movement towards figuring out if you can have a long-term view on FX or currencies as an investment product,” Lee said. “When we get to that point, we’ll see adoption by mainstream retail finance companies. Until then, it will remain the domain of active traders going in and out as much as they can.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.